Kotak Flexicap Fund: Too big to be flexible?

• The fund uses a top down approach to select outperforming sectors, and takes concentrated sector bets.
• The fund has returned 11.55% in the last 5 years, and 22.9% in the last 3 years.
• Today, there are 9 funds in the Flexicap category larger than ₹10,000 crore AUM compared to only one in 2015.

In March 2023, The Kotak Flexicap Fund had assets under management (AUM) of ₹36,056 crore. The fund has returned 11.55% in the last five years, and 22.9% in the last three years. The fund has also withstood different market cycles over the years, generating Alpha even during times of demonetisation, Covid, and other market corrections.

Let us take a closer look at this fund.

First, let us understand what a flexicap fund is. Flexicap funds are mutual funds that have the flexibility to invest in companies of any market capitalisation, ranging from large-cap to small-cap stocks. The term "agility" in the context of flexicap funds refers to the fund's ability to adapt, and adjust its portfolio allocation based on market conditions, and investment opportunities.

With the flexibility to invest in companies of different sizes and sectors, flexicap funds can swiftly respond to changing market dynamics, and adjust their holdings accordingly. This agility allows the fund managers to capitalise on emerging trends, and potentially generate attractive returns for investors.

Since different sectors perform varyingly across market/economic phases, the Kotak Flexicap fund uses a top down approach to select outperforming sectors, and takes concentrated sector bets. Then it takes a bottom-up stock picking approach across different sectors. Being a flexicap fund, it has the flexibility to move across market capitalisation ranges.

“Even today, while the name has changed, the approach has remained the same. It is a blend of top down approach to select a few sectors which are likely to do well. Depending on the sectors which are likely to do well, we take concentrated sector exposure,” says Harsha Upadhyaya, President, and Chief Investment Officer, Equity, Kotak Mahindra Asset Management Company.

Performance of Kotak Flexicap Fund - Direct Plan

As of 30th April 2023

Changing regulations

The fund was launched in 2009, when it was called the Kotak Select Focus Fund. In 2017 the name was changed to Kotak Standard Multicap Fund, because the ‘Focus’ name was associated with a different category. “But the investment approach remained the same,” says Upadhyaya.

During the pandemic, Sebi decided that multi-cap funds need to have at least 25% investment in each category- small-cap, mid-cap and large-cap. However, converting existing multicap funds would have led to a huge impact on the funds, and the market at that point of time. Sebi gave an option to switch to the new multicap category where a fund had to invest 25% in each market cap, or to a flexicap category which was similar to the earlier multi-cap. Here, there was no investment restriction, it could go from 0-100 in any bucket without any restriction. Then the Kotal Flexicap Fund was born.

What you should consider before investing

Today, there are nine funds in the Flexicap category larger than ₹10,000 crore AUM compared to only 1 in 2015, showcasing the healthy growth across the industry.

“Our fund has performed strongly. As on 30th June 2023, the 10-year CAGR is 17.6% with an alpha of 2.6%. The 1-year performance is 25.3% with an alpha of 1.4%. The long term track record and positive alpha in recent performance proves size isn't a barrier to positive returns. In short, size is not a constraint,” says Upadhyaya.

Returns of Flexicap Funds

Source: Value Research, Returns as on 30 June, 2023

Dhirendra Kumar, CEO, Value Research, offers a different point of view. “This is an equity fund and has a great track record. However, since it has become very big, it is very heavily tilted towards large caps. By design it is a flexicap fund, but by compulsion it is dominantly a large-cap fund.”

Kumar suggests that investors may look for relatively smaller flexicap funds. They may also consider multicap funds which will definitely have large-cap, mid-cap and small-cap allocation.

They may also go for an index fund, because if you are going to invest in a large-cap fund, there is around 1.5% expense, while you can buy a large cap index fund which will have a 10 basis point expense. If a large cap fund does as good as the index then you are losing out, it has to generate higher returns than the index for it to make investment sense.

Return of Index Funds with a 5-year track record